# What are the standard industry practices or disclosures for computing compounded interest on retail deposit accounts in the United States?

I'm seeking to understand how my bank calculates the interest on my various deposit accounts (Money Market, Interest Checking, Savings, Certificate of Deposit) in order to simulate and predict it to a very precise degree. So far I was not able to find any formulas or calculations in the Truth In Savings mandated disclosure that accompanies any newly opened account.

When speaking with a customer representative they did detail the computation method with some bit of precision.

• The interest is computed to 4 significant digits if less than a penny and the fourth digit is rounded using the 5th and added to the principal
• The interest is computed to 2 significant digits if greater than or equal to a penny and rounded using the 3rd digit and added to the principal
• If the interest accumulated within the span of a calendar month is less than a penny, the accrued interest is reset to zero and not credited to the account
• A digit is rounded up if the digit to its right is 5 or greater
• A year consists of 365 days even on leap years

This is a bank that compounds daily. I failed to ask them how many significant digits their periodic rates and APRs used in computing contain and if any rounding rules apply to those.

My question is there a common term for these practices or a typical disclosure document I can request from banks to get this information? Is it regulated in any way or our banks free to set their own policy? I know in quoting interest rates on deposit accounts banks have to use a 365 day based APY due to the Truth in Savings Act here in the US, and conventionally they quote that as a percentage with two significant digits, but I don't know whether that is mandated as well.

My end goal is to open a small deposit account and accurately predict and model the day to day value of the account as if I were the bank. For fun, I guess at the moment.

• Welcome to Money.SE. Not sure how this question and its answer would help anyone in the future. We're talking a fraction of a penny, right? Jan 14, 2014 at 15:12
• I've had similar problems to this with the reconciling the interest on my mortgage - making the result a bit more significant but still not huge in the grand scheme of things. It did bother me enough to spend a bit of time arguing with the mortgage provider though. Jan 14, 2014 at 19:23
• If the interest was \$1234.5678, and it was rounded to two significant figures, you would get only \$1200.00. That almost has to be an error. Rounding to two decimal places instead of two significant figures would change it to \$1234.57. May 20, 2015 at 14:15
• I also have similar problems. The amount of money really is insignificant, but it's easier to cross check things if they match exactly rather than being a fraction of a cent (or a fraction of a baht, in my case) out. Every now and then they seem to round the wrong way on a 100th of a baht and I can't find any way to match it up. It seems to more or less average out though, so the entire mortgage is currently 1 100th of a baht out, but still... Possibly I need to seek help for OCD instead of trying to balance this? :D Jul 10, 2015 at 5:42

I think the minutia of deposit interest rates are not regulated in the U.S.. There is not a standard document or disclosure you can ask for from a financial institution.

In my experience, deposit interest is calculated on a 365-day year basis, even for leap years, and is calculated to 5 decimal places. The interest is then rounded to the penny and paid to the account. If at the end of the interest cycle the accrued interest is less than a penny, the accrued interest is reset to zero for the next cycle. Interest is calculated using an average balance for the cycle.

For example, an account with an interest rate of .10% with \$10,000 average balance on a monthly cycle:

• Jan 1 thru Jan 31 - 10000.00 * .0010 / 365 * 31 = .84932 rounded to .85
• Feb 1 thru Feb 28 - 10000.85 * .0010 / 365 * 28 = .76719 rounded to .77
• Mar 1 thru Mar 31 - 10001.62 * .0010 / 365 * 31 = .84945 rounded to .85

Days in a cycle are calculated using actual calendar days, including weekends and holidays. If February were in a leap year, 29 days would be credited in the cycle.

None of this applies to loan interest, which does not always follow a 365-day year.

I know this is an old post, but the answers given earlier are incorrect.

Annual Percentage Yield (APY) has very specific definition spelled out in Federal Regulation DD (Truth In Savings).

What APY is not (not Necessarily at least): a calculation of the interest you will actually earn.

What APY is: Minutia defined by Federal Reserve Reg DD assuming a 365 day year with daily interest compounding. There are caveats for certain circumstances in the regulation but this is the basic rule in the reg.

Why the fake number: Because someone that wrote the rules thinks you're too stupid to compare apples to apples (true yield) across institutions or products, so they require that all banks compare their apples to the same Federal standard orange.

The annual percentage yield is expressed as an annualized rate, based on a 365-day year. Institutions may calculate the annual percentage yield based on a 365-day or a 366-day year in a leap year. Part I of this appendix discusses the annual percentage yield calculations for account disclosures and advertisements, while Part II discusses annual percentage yield earned calculations for periodic statements."